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A tsunami hits the book world

16 April 2012

At the beginning of the week it looked like the London Book Fair would be the story of the week. But by mid-week a tsunami had swept through the book world and there was only one story dominating the headlines.

In a move which may ultimately affect publishing across the world, the American Department of Justice filed an antitrust lawsuit alleging that Apple and five publishers (Hachette, Macmillan, Penguin, Simon & Schuster and HarperCollins) conspired to limit competition for the pricing of e-books when they moved to the agency model in early 2010 in a "collective effort to end retail price competition by coordinating their transition to an agency model across all retailers".

Three of the publishers, Hachette, HarperCollins and Simon & Schuster have settled. Under the terms of this settlement, they have agreed not to enter into any contracts that prevent retailers from setting their own e-book prices for a two-year period, and "shall not enter into any agreement with an e-book retailer relating to the sale of e-books that contains a price Most Favoured Nation".

Macmillan and Penguin made a brave and highly risky decision to fight on.

John Sargent, the CEO of Macmillan, wrote: 'It is ... hard to settle a lawsuit when you know you have done no wrong. The government's charge is that Macmillan's CEO colluded with other CEO's in changing to the agency model. I am Macmillan's CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22, 2010 a little after 4:00 AM, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.

'We have been in discussions with the Department of Justice for months. It is always better if possible to settle these matters before a case is brought. The costs of continuing--in time, distraction, and expense--are truly daunting. But the terms the DOJ demanded were too onerous. After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.'

The developments could have huge implications for the way e-books are sold worldwide.

Publishers and booksellers argue that any victory for consumers will be short-lived, and that the ultimate effect of the antitrust suit will be to exchange a perceived monopoly for a real one. Amazon, already the dominant force in the industry, will hold all the cards.

'Amazon must be unbelievably happy today', said Michael Norris, a book publishing analyst with Simba Information. 'Had they been puppeteering this whole play, it could not have worked out better for them.'

The government suit, filed in United States District Court for the Southern District in New York, made clear that the publishers were resentful and angry about the way that their relationship with Amazon had evolved. The retailer started out a customer of the publishers, but became a competitor. Even as the publishers and Apple negotiated in early 2010, the suit said, Amazon announced its own publishing program.

It was not a coincidence that as soon as the Department of Justice made this announcement on Wednesday that it was suing five major publishers and Apple on price-fixing charges, and simultaneously settling with three of them, Amazon announced plans to push down prices on e-books.

Philip Jones commented in the Bookseller's Futurebook: 'Both companies are taking an enormous risk in seeing the DoJ in court. The evidence against them looks substantial, notwithstanding Makinson's view that the DoJ filing "contains a number of material misstatements and omissions". The costs will be huge, the implications if they lose enormous, and the potential for further reputational damage, even if they do pull off a win, clear.

The bigger worry is that publishers have not just lost this battle, they will also now lose the peace. Even if collusion did not take place, the suggestion of it is now indelible. If you read some of the anti-publisher blogs now appearing, or even blogs published by neutral observers, you'll quickly get the message.

Publishers now need to focus on the next step: adjusting to a world where e-books become the dominant format (at least for narrative fiction), where they have little control over whether their audience chooses to read in e or p, and where they cannot create barriers to e-book adoption by using price... Make no mistake: this was an earthquake. But despite what you will read elsewhere, the big publishers are still standing - just. What they do next will determine how long they remain so.'

Preston Gralla in Computerworld thought it had wide implications for readers too: 'The federal suit, if successful, will allow Amazon to gain back that monopoly, and the biggest victim will be readers. Start off with e-book prices. Amazon can sell e-books at less than the price they pay publishers because they want to increase Kindle sales, and put competitors out of business. Once it's done that, though, it won't sell e-books at less than cost. It'll jack up prices, and given that it won't have any serious competitors, it'll raise them higher than if it had competition. So you may pay less for e-books today, but you'll pay more in the future.

An even bigger problem will be the choice of books you can buy, and where you can buy them.'